Mohit, a middle- aged businessman was once a defaulter for a business loan, which he settled with the bank later on. Years after, when wanted to startup a fresh venture, he was denied a new business loan approval. Shocked, he checked with the bank and got to know that the denial was due to his low CIBIL score. Today, he is working on improving his CIBIL score. CIBIL or the Credit Information Bureau of India Limited is an agency that provides credit score and reports to individuals. Banks check your CIBIL score before starting the approval process involved in any loan or credit card. The greater your CIBIL score, the greater is your chance of loan approval. It is estimated that around 75% of the loans approved are for the individuals whose CIBIL score is 750 or more. A low score indicates defaults or delay in repayments.
PV Subramanyam, Finance Expert says, “CIBIL score ranges from 300 to 900. Anything above 750 is considered very well. Loan is sanctioned on the basis of CIBIL score, income level, monthly ability to repay loan based on other income, expenses, spouses’ income, etc”. (source http://www.mirrornow.in/videos/legal-tax/how-much-should-be-cibil-score-avail-loan/25972)
Maintaining a healthy credit portfolio is the key to your business loan approved. For business loans, you must obtain a CCR or a CIBIL Company Credit Card Report. This is created by data submitted to CIBIL by lending institutions across India. Here, it should be noted that CCR is not a credit rating, but is heavily relied on by lenders to evaluate and approve loan applications. You will be required to purchase CCR for your company. Improving the CIBIL score is not a herculean task, but it requires a lot of financial commitment.
In this write-up, we will talk about the ways to improve your CIBIL score and maximize your chances of business loan approval-
1. Keep checking your credit score regularly
This is a good idea as it will let you know about the loans or credit cards where default or delay in repayments exists. It will also show you the information that is recorded in the credit card. If you see any negative information, you can immediately contact your lender or CIBIL and get it fixed.
2. Make timely Repayments
Delays in repayment result in lowering the credit score. If you (or your business) have any existing credit facility (business loan, auto loan, credit card) make sure you are timely repaying the installments.
3. Never cross credit limits
To maintain a healthy credit repayment track, liquidity and access to funds are very important factors. You must strive to keep the total credit utilized vs. the sanctioned line of credit below 30- 40 percent. And any outstanding amount should be paid in the billing cycle.
4. Never show a credit hungry behavior
Having multiple loans or credit cards make you credit hungry. Also, don’t keep discarding old credit cards and changing to new ones. An old credit card with a good track record of timely repayments improves your credit score to a great extent.
5. Never apply for too many loans, unnecessarily
When not required, you must avoid applying for loans or credit cards. CIBIL keeps a record of all such applications, and the rejected ones result in lowering of CIBIL score.
6. Avoid over- leveraging
Over leverage takes place when a large amount of loan is borrowed as compared to your income sources. During the sanctioning of business loans, banks very carefully observe previous loans taken by the business against their income source and their status. If there is no sync between that debt amount and the income source, the business is said to be over leveraged, and this can result in a much lower credit score.
On an average, it takes around 4 to 12 months of careful financial planning to improve your CIBIL score. Good Luck!